Outlook: Best to sell in May and go away
Wednesday 05 May 1999
The present phase of the upswing on Wall Street is in part down to the switch back to previously neglected cyclical stocks. With the growth stocks of IT, telecommunications and life science possibly beginning to run out of steam, this has added fresh impetus to stock markets.
There is plainly more to it than that, however. Goldman Sachs was valued at an astonishing $35bn when its shares started trading on the stock market yesterday, a premium of more than 40 per cent to the issue price. The big number is also higher than the value that investment banks were commanding early last summer, before the Russian collapse. Memories are short, it seems, but for Wall Street to adopt its present party mood, they have to be.
The present euphoria can no longer accurately be described as a bull market. The charts show an almost exponential ascent into the heavens. Whether or not this is a bubble, it is certainly starting to look highly dangerous. Economies are sometimes capable of achieving a soft landing after a period of boom, but markets almost invariably are not. After a prolonged bout of excess, there is always a reckoning.
Nobody in their right mind would stick money into Wall Street at these levels. The legendary Warren Buffett didn't put it quite like that to the Berkshire Hathaway annual general meeting last weekend, but he came pretty close. Valuations have been stretched to breaking point. The reasons for this are well rehearsed, and indeed many of them are entirely logical.
Not least of these is the "wall of money" argument. There's an awful lot of money around, it has to go somewhere, and given that the US economy is still vibrant and booming, unlike almost everywhere else, it seems reasonable to stick it into Wall Street. America leads the world in technology and growth; its stock markets therefore deserve to command a corresponding premium.
Nothing is obviously about to go pop in the US economy. Rather the reverse. The outlook is still much better than for almost anywhere else. Other stock markets seem to be booming or recovering too, most notably Japan, Hong Kong and some other areas of the Far East. But the engine here is again the raging bull of Wall Street. It is American money that is driving these stock markets higher, not the locals.
The trade deficit may be cause for some concern, but as a proportion of GDP, it is not yet at record levels and as long as foreigners continue to express confidence in the US economy by pouring their capital into the region, the problem is a containable one.
However, none of this is cause for much comfort about the soaraway stock market, which has plainly risen too far, too fast. The most likely cause of any correction is still a resurgence in inflationary pressures, bringing on a rise in interest rates.
You'll be astonished at how quickly the wall of money will disappear in such circumstances. The boom may have further to go yet, but is the lure of that extra 10 per cent worth the risk of getting trampled in the rush when the panic sets in? Sell in May and go away looks like being very sound advise right now.
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